Karuturi sues bosses over secret loans

Peter Mehta, a community leader in South Lake, Kenya, addresses some of the 2,600 workers from Karuturi flower farm outside the farm’s gate on May 6, 2014, after it was put under receivership by CfC Stanbic Bank (Photo: The Star)

The Star | Jul. 10, 2018

Karuturi sues bosses over secret loans

By BRIAN WASUNA @bwasuna

Naivasha-based flower firm Karuturi has sued Stanbic Bank and four receiver managers for allegedly thwarting its revival through mismanagement and secret acquisition of loans.

The move comes as a twist to the four-year battle to expel the statutory managers. The firm says the managers have secretly secured Sh12.9 billion in loans.

The firm claims Stanbic secretly advanced a Sh673 million loan to the firm to increase its total indebtedness to Sh1.6 billion.

The bank placed Karuturi under receivership on February 10, 2014 over an unpaid Sh601 million loan.

Kieran Day and Ian Small were appointed to run Karuturi's affairs until October 2015 when they were replaced by Kuria Muchiru and Muniu Thoiti of PriceWaterhouseCoopers.

Karuturi's owners moved to court to challenge the decision.

In June 2014, Indian bank ICICI appointed Lolluri Kamasastry as a joint receiver manager to help it recover a Sh4 billion loan.

A year later, High Court judge Francis Gikonyo locked Kamasatry out of Karuturi's affairs, saying ICICI had breached the loan agreement.

Gikonyo said ICICI failed to advance Sh2.5 billion to Karuturi. The court observed that the money would have helped the firm's business.

Karuturi still owes creditors Sh3.2 billion.

In January this year, the firm sought High Court judge Francis Tuiyott's permission to amend their suit against Stanbic.

The amendment led to the inclusion of mismanagement and sabotage as claims against the receiver managers.

“By December 31, 2016, Stanbic had with the complicity of Small, Day, Muchiru and Thoiti misappropriated over Sh1 billion in the pretence of recouping an alleged debt of Sh400 million. The misappropriated sum has been irregularly posted as a debt due from Karuturi Limited," Karuturi say in the amended suit.

“In a further attempt to redeem securities, the firm approached two banks who were willing to take over the loan from Stanbic. But the banks pulled out as a result of Stanbic's, Small's, Day's, Muchiru's and Thoiti's joint lack of goodwill.”

Karuturi wants Stanbic compelled to unconditionally hand over the firm to owners and erase the loan amount claimed by the lender before and after the receivership.

The owners say the firm's run down is a collusion between Stanbic, politicians and well connected businessmen who want to acquire their prime assets.

They accused Stanbic's receiver managers of allowing pests to invade its farms, failing to harvest on time and instructing 2,200 employees not to go to work.

Karuturi says the managers actions and inactions led to a loss of Sh11.5 million daily since the receivership began.

It wants Stanbic compelled to pay Sh8.74 billion in compensation for losses between February 10, 2014 and May 6, 2016 when flowers were last harvested.

The woes bedeviling former workers of Karuturi flower farm in Naivasha have deepened after the receiver-manager kicked them out of their houses.

Following the move the Kenya Plantations and Agricultural Workers Union (KPAWU) has issued a one week notice to the receiver-managers to rescind the decision or face legal action.

In a letter signed by the Union’s Organizing Secretary Meshack Khisa, the houses that belonged to the workers have now been given to other tenants a move he termed as illegal.

Khisa said though the company closed shop and the workers were no longer required to work there, they had a right to live in the houses until their demands and allowances were full paid.

“We have learnt with dismay that you have resorted to evicting former employees of Karuturi farm from the company allocated staff quarters,”

“You have instead rented out the houses to individuals despite the fact that the houses are registered under the names of Karuturi limited in the companies act”, read the letter.

Khisa said the former workers were owed millions by the company noting that they were bound to live there until their dues were fully paid.

“No one wants to live there but the workers should not be forced by the liquidators to move out yet they have not been paid for the years they have worked at the farm,” he said.

He claimed that some of the neighboring farms in the area had leased the houses for their staff while those from Karuturi were forcefully evicted to pave way for the new occupants.

“We demand that you return house hold properties that are within your custody and those illegally obtained failure to which we will instigate criminal proceedings for unlawful eviction,”

“Should you not return the said properties to the affected within seven days from the date of this letter we will file legal proceedings for wrongful and fraudulent trading contrary to your statutory obligations”, reads the letter in part.

This came as local leaders said the workers were living in abject poverty with the houses being filled up in sewerage and litter sprawling all over.

Local Maendeleo Ya Wanawake organization branch chair Esther Nyokabi said they had been forced to distribute food items to the families who have nowhere to turn to go since the farm was closed.

Nyokabi alleged that no company was willing to accommodate the workers in spite of their experience saying they have been left to the mercies of local residents.

In the last week of June 2015, Nakuru County Commissioner received a rare complaint from a player in the flower industry.

It was not just strange but unprecedented.

County Commissioner Mohamed Birik was being asked to mediate between owners of Karuturi Limited, which used to be one of Kenya’s most successful flower company and its new receiver managers.

The complainant was a Mr Ian Small, the lead receiver manager of Karuturi Ltd.

Small had been appointed jointly with Kieran Day to run the firm after it was placed under receivership. They had run the company for over one year before this incident.

Small was escalating his complaint given that even police officers in their nearest Naivasha station were finding it difficult to mediate.

He reported that Mr Sai Ramakrishna Karuturi and Shireesh Jain, the company managers before it was put under receivership, along with other unknown persons allegedly invaded company property and broke office doors.

According to the police report, the team took away various assets including laptops, mobile phones and desktops.

"The matter was reported to the Officer Commanding Station (OCS) – Kongoni who intervened and the invaders were requested to surrender the assets they had stolen,” the police report reads in part.

The complaint was recorded in the occurrence book number 05/25/06/2015 at Kongoni police station.

But of immediate concern for Ian was a planned meeting where the former directors were to address employees of the flower company. This was urgent and needed immediate intervention.

"I have learnt that the two persons mentioned above intend to address our employees with the intention of inciting them in an effort to destabilise the operations of the farm. Such incitement is likely to result in demonstrations and breach of peace," he wrote.

This is the story of what was one of Kenya's most successful flower companies, which even courts can only delay its imminent crash. The fights came immediately Stanbic Bank placed the company under receivership.

The possibility of the owners losing a company they had painfully built was now becoming clearer. Jobs of 2,400 employees were now at risk. More than 10,000 other people who depended on the farm indirectly from businesses around the farm, the vendors all the way to exporters were also staring at losing that part of the business.

This will also not be the only problems that its owner, Sai Ramakrishna Karuturi is dealing with. In Kenya and Ethiopia, his flower empire has withered. Banks are after him. The taxman has stretched his arm, seeking his pound of flesh in tax arrears.

Findings of a forensic audit by Deloitte have summarised the story of Karuturi in all too familiar steps. You walk to a bank. Take a loan. Default. And you are forced to cough it up. You lose control. Run to the courts for refuge.

But it is a lot more complicated than that.

A court ordered Deloitte to conduct a forensic audit of the firm following revelations by the bank that the firm’s level of indebtedness had worsened after being placed under receivership.

The real owners of the firm would hear none of this.

Karuturi, the beginning

The flower firm is a Kenyan company that was operating a 134-hectare rose farming business in Naivasha. It is fully owned by Karuturi Global, an Indian company listed on the Bangalore stock exchange.

The firm was originally set up and operated by a Dutch family who sold it to Karuturi Global in 2007.

It set its first debt trap in 2010 when it took a Sh227 million loan from CFC Stanbic Bank. Two years later, it went back to the lender in January 2013 where it took a dollar-denominated loan of $3.8 million which translates to about Sh380 million at the current exchange rates.

But by the end of the year, the operations of the firm were coming to a near standstill following incessant labour disputes. At this time, the firm was also struggling to make its debt repayments.

It was at this time that CFC Stanbic appointed Ian Small and Kieran Day as receiver managers from February 2014, who have now been replaced.

At this time, the firm owed about $4 million (Sh400 million) and another Sh2 million in local currency. Interests continued to accrue as well as additional expenses which pushed the debt to $6.2 million (Sh620 million) by the end of December 2016.

When Small and his team took over the business, a decision was taken to go back to trading in an effort to preserve the value of the firm and possibly make money to repay its debts.

The strategy was to normalise its operations after restarting its production and then sell it off as a going concern. But the owners of the firm would not let this go on without a fight.

They moved to court and applied for an injunction blocking the disposal of the firm. They got a temporary reprieve from the courts after their prayer for an injunction was granted. This injunction would leave the new receiver managers, who had to learn very fast on the job, how to run a flower firm.

Their nightmare was worse given that the firm was losing money every month it remained in operation and would not survive without choking up more debts. The firm incurred more expenses compared to revenues generated, resulting in an even bigger deficit position.

As at December 2016, the firm’s deficit position had risen to Sh940 million and was racing to hit the billion mark.

The fact that the equipment and crop were in a bad state of disrepair only made the situation worse. "The farm was not operational at the commencement of the receivership in February 2014. The biological assets were in a state of neglect, production and sales activity had come to a standstill,” a report by the joint receiver managers reads in part.

The report says that the company had also lost its business license and did not have a number of certifications that would enable it to sell its products in international markets.

Electricity supply to the farm operations had also been disconnected due to arrears, medical facilities on site at the farm had become in-operational, and irrigation, plumbing and electrical equipment on the farm had fallen into disrepair.

More debt

It did not stop borrowing. The firm would take up other loans and overdraft facilities making its debt position irredeemable.

The bank provided an overdraft facility of a further Sh600 million to help with the payment of critical expenses of the company, including distress creditors and employees dues in an effort to preserve the value of the assets, at least in the short term. These facilities also attracted interests. By the end of 2016, they had attracted Sh200 million in interest.

In addition to interest and penalties as well as the loans before receivership, the firm was now owing Stanbic Sh1.5 billion.

It is not only Stanbic that the firm owed by the end of 2016. Other creditors had also slapped the firm with demand notices bringing the total debt to about $32 million or Sh3.2 billion.

The firm was also incurring other expenses to continue running. Among them receiver fees, security expenses, electricity, salaries, casual wages, water, sanitary and exhaust services. Between January to July last year, these costs were adding another cost of nearly Sh100 million.

After taking over the company, the new receivers could not survive without taking more debt. They again requested fresh funding from CFC Stanbic in order to support the envisaged trading operation.

These taking of additional loans into receivership would later form one of the grounds for litigation.

But the receivers did what they thought they needed to try and keep the business running as a going concern. The plan was to eventually put the assets of the company on sale after breathing life into it.

But this dream was cut short in July 2014 after a court injunction barred the receiver managers from selling any assets of the company. This forced them to continue running the company as they waited for the completion of the court battle.

In 2015, Ian Small, the lead receiver manager who was running the Karuturi operations relocated to the Netherlands. As a result, CFC Stanbic appointed a new set of managers led by Muniu Thoithi and Kuria Muchiru of PwC.

They took over on October 21, 2015. The injunction stopping sale of the firm’s assets remained in force.

Points of friction

During the receivership period, owners and employers did not agree with some of the decisions that were taken by the caretaker managers.

Besides the new debts, they disputed some of the flower production numbers as reported by the receivers. Union officials went ahead to present parallel production records that suggested that the management were underreporting.

For instance, union data suggested that the production of stems as at December 31, 2015, was 463 million. However, the receiver managers reported 403 million stems, a difference of 60 million flower stems.

When forensic auditors from Deloitte went to ascertain these claims, they reported that their interviews with Karuturi employees showed that production figures were verbally communicated by employees working in the grading halls to union officials.

"The number of stems produced would be communicated to Mr Samson Ounda, the union branch chief shop steward, who would then record the information on a piece of paper which he would submit to the union offices for compilation,” the report says. The union officials maintained these records to ensure that bonus payments to their members were accurate and fair.

Deloitte observed that the union did not have a formal mandate or capacity to maintain parallel production records as alleged by the Karuturi directors. There were other inconsistencies given that the records showed production of stems on days when employees were on strike. This raised doubt on the reliability of the union data.

To support their case that receivers were under-reporting, directors of the firm had engaged PKF to conduct an audit on the production process and financial statements of Karuturi when it was under receivership. However, PKF used approximations in their analysis making their report also unreliable.

"We noted that the PKF report used production numbers as presented in a document captioned ‘the approximate flower receipt’ from greenhouse forms," the report notes.

"These forms contained an approximation of flowers harvested from the greenhouses before grading and therefore the records could not be relied upon in the determination of flowers produced and sold to the market,” the report adds.

In dismissing the PKF report, the forensic auditors also noted that PKF made various unverifiable assumptions by using extrapolated production numbers. Instead of using actual numbers, PKF used estimates and this would end up costing the credibility of their work and weakening their case.

The other matter in contention is the transfer pricing question.

The appointed receiver managers (Ian Small) established a private company Twiga BV in the Netherlands in October 2014. The firm was said to provide administrative support to Karuturi. The firm was to help Karuturi sell flowers in the Netherlands. Its support functions included selection of vendors, invoicing and general administrative functions.

A year later, shares of Twiga BV were transferred from Ian Small to Karuturi under the directorship of Mr Muniu Thoithi, the new receiver-manager.

But Deloitte ruled out the existence of transfer pricing between the two firms.

"After assessing the nature of the relationship between KLIR (Karuturi Limited in Liquidation) and Twiga BV, we noted that the issue of transfer pricing does not arise. KLIR did not sell flowers to Twiga BV,” the report notes.

Forensic auditors say Twiga only facilitated the sale of flowers on behalf of Karuturi and remitted its revenues from the sale of flowers back to Karuturi.

This is the report that the court will rely on to make a final determination on the bank’s application to be allowed to wind up the firm and sell off its assets. If granted, this will be the end of the firm.

Troubled Naivasha-based flower farm, Karuturi Ltd, has asked the High Court to terminate the services of receiver managers appointed in 2014 to run its operations. In papers filed before the Milimani law court's Commercial and Admiralty Division, Karuturi claimed that the failure of CFC Stanbic to advance loan and overdraft facilities had led to the collapse of the flower firm operations in 2014.

According to documents filed in court, Karuturi said that on May 9, 2012, it entered into an agreement to receive loans and overdraft facilities amounting to $6,590,000 (Sh650 million) from the bank. In the agreement, Karuturi secured the loans that were charged to its properties valued at $90 million (Sh9.09 billion). Karuturi claimed that the company had agreed to repay the loans through proceeds from its flower exports. However, in 2014 Karuturi claimed CFC Stanbic recalled the credit facility after only disbursing $2.59 million (Sh261.6 million) leading to a crisis at the firm, which could not meet contractual and financial obligations.

This, Karuturi says, led to suits by its suppliers and employees. The firm claims that the bank breached the contract and acted with 'malice and in bad faith' by recalling the loan and overdraft facilities at a time when the company had committed heavy financial investments in readiness for a high crop season.

According to Karuturi, the receiver managers - Kieran Day, Ian Small, Muniu Thoithi and Kuria Mucheru - who were appointed to take over the operations of the flower farm were not qualified to run the company. Karuturi has asked the court to declare the appointment of Kerian Day and Ian Small as receivers as unlawful and illegal. It further wants the court to permanently restrain CFC Stanbic Bank from liquidating its assets. The firm wants the court to declare that the bank breached its contractual obligations after it declined to disburse the entire loan and overdraft facility.